How AI and Cloud Are Changing TUPE Rules in IT Outsourcing

TUPE or Not TUPE? How AI and Cloud Are Changing Supplier Transitions

Automation, AI, and cloud services are reshaping the way outsourcing contracts work, especially regarding the Transfer of Undertakings (Protection of Employment) Regulations 2006, known as TUPE. Many IT professionals don't realize how these technologies disrupt the legal and human elements of supplier transitions.

With 92% of companies planning to boost AI and tech investment but only 1% considering themselves AI-mature, there’s a growing legal gray area and operational risk during supplier changes.

When Does TUPE Apply?

TUPE protects employees when services transfer between suppliers. The key question is whether the new service is "fundamentally the same" as the old one. If it is, TUPE usually applies. If not, it doesn't.

For example, if a new IT support contract replaces on-site engineers with a cloud-based helpdesk and automated diagnostics, TUPE may not apply. But if a robot only replaces some cleaning tasks while humans still perform others, TUPE likely still applies.

In IT services, if a cloud provider takes over infrastructure management but the support activities remain largely unchanged, TUPE could still apply. However, if support models change so much that old and new services are barely comparable, TUPE may not apply, meaning staff remain with the original supplier.

Hybrid models and phased rollouts create uncertainty. When some tasks are automated and others remain human-led, it can be unclear if the service is still “fundamentally the same.”

Who Covers Costs When Staff Don’t Transfer?

If TUPE doesn’t apply, the outgoing supplier—or the customer in first-time outsourcing—is responsible for redeploying or making staff redundant, including related costs. If TUPE applies, the new supplier inherits the employees.

If automation reduces required headcount after transfer, the new supplier handles redundancies. But if the outgoing supplier didn’t plan for redundancy cost recovery in the contract, they may bear the cost instead.

Key Contract Clauses to Manage TUPE Risk

Both suppliers and customers need to update contracts to address these challenges. Essential clauses include:

• Redundancy cost clauses: Define who pays if TUPE doesn’t apply.
• TUPE risk allocation: Agree upfront who carries risk if there’s a dispute.
• Transformation timing: Specify if automation happens at contract start or mid-term, and who bears redundancy costs if mid-term.
• Exit planning: Prepare for TUPE potentially not applying at contract end if services will be replaced by AI or technology.

Incoming suppliers should factor redundancy costs into pricing or negotiate cost coverage with customers. Outgoing suppliers should understand their rights and seek contract protections early on. TUPE can no longer be an afterthought in tech-driven transformations.

Practical Steps for Legal Teams

As AI and cloud reshape service delivery, legal professionals must rethink assumptions and update contract frameworks. Collaborating with procurement, HR, and IT teams helps manage legal, financial, and human risks effectively.

Early planning and clear contract terms focused on employee impact will be vital. TUPE remains a crucial factor in service transitions and highlights the need for a people-first approach in AI adoption.

For legal professionals interested in how AI impacts contracts and workforce transitions, exploring relevant AI courses can help build expertise. For example, Complete AI Training’s latest AI courses offer practical insights into AI’s role in business transformation.